UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 [X]     
 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
 For the quarterly period
ended June 30, 2008
  OR
 
 [
]        TRANSITION REPORT UNDER SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from ____________
to_____________
 
 
 Commission
file number 333 - 38558
 
 KODIAK ENERGY,
INC.
 (Exact
name of registrant as specified in its charter)
 
 
 Delaware
              65-0967706(State
      or other jurisdiction of incorporation
      or organization)
              (I.R.S.
      Employer Identification
      No.)
  734 7th Avenue
S.W.Calgary,ABT2P 3P8
 (Address
of principal executive offices - Zip code)
 
 (403)
262-8044
 (Registrant's
telephone number, including area code)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days.        Yes  X   No ___
 
 Indicate
by check mark whether the registrant is a large accelerated filer,
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
 Exchange
Act. (Check one):
 
 Large
      Accelerated
      Filer                           
           o
              Accelerated
      Filer                    
      xNon-Accelerated
      Filer                                 
       o
                (Do
      not check if a smaller reporting company)
              Smaller
      Reporting Company     o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of The Exchange Act) Yes     No X
 
 APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:
 
 Check
whether the registrant filed all documents and reports required to be filed by
Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court.    Yes  X   No
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the registrant's classes of common
equity, as of the latest practicable date: 110,023,998 common shares, $.001
par value, as at August 8, 2008.
  
  KODIAK
ENERGY, INC.
 INDEX
 
 PART
      I.
              FINANCIAL
      INFORMATION
              3ITEM
      1.
              FINANCIAL
      STATEMENTS
              3Consolidated
      Balance Sheets
              3Consolidated
      Statement of Shareholders’ Equity (unaudited)
              4Consolidated
      Statements of Operations (unaudited)
              5Consolidated
      Statements of Cash Flows (unaudited)
              6Notes
      to Consolidated Financial Statements (unaudited)
              7ITEM 2.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              27ITEM
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              37ITEM 4.
              CONTROLS
      AND PROCEDURES
              38PART
      II.
              OTHER
      INFORMATION
              39ITEM
      1.
              LEGAL
      PROCEEDINGS
              39ITEM 1A.
              RISK
      FACTORS
              39ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              44ITEM 3.
              DEFAULTS
      UPON SENIOR SECURITIES
              44ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              44ITEM
      5.
              OTHER
      INFORMATION
              44ITEM 6.
              EXHIBITS
      AND REPORTS ON FORM 8-K
              44
 
  
  PART I. FINANCIAL INFORMATION
 
 ITEM
1.  FINANCIAL STATEMENTS
 
 KODIAK ENERGY, INC.Consolidated
      Balance Sheets(Exploration
      Stage Company Going Concern Uncertainty – Note 1)June
      30
              
              
              December
      312008
              
              
              2007(Unaudited)
              
              
              (Audited)AssetsCurrent
      Assets:Cash
      and Short Term Deposits
              
              $
              737,599
              
              
              $
              8,983,682Accounts
      Receivable (Note 4)
              
              
              1,359,618
              
              
              
              1,214,253Prepaid
      Expenses and Deposits
              
              
              123,141
              
              
              
              90,4752,220,358
              
              
              
              10,288,410Other
      Assets (Note 5)
              
              
              346,303
              
              
              
              359,353Capital
      Assets (Note 6):Unproved
      Oil & Gas Properties Excluded FromAmortization
      – Based on Full Cost Accounting
              
              
              33,567,220
              
              
              
              23,967,351Property
      & Equipment
              
              
              80,287
              
              
              
              75,65433,647,507
              
              
              
              24,043,005Total
      Assets
              
              $
              36,214,168
              
              
              $
              34,690,768Liabilities
      and Shareholders' EquityCurrent
      Liabilities:Accounts
      Payable
              
              $
              1,067,083
              
              
              
              1,547,273Accrued
      Liabilities
              
              
              446,303
              
              
              
              755,2821,513,386
              
              
              
              2,302,555Long-term
      Liabilities (Note 7)
              
              
              46,898
              
              
              
              110,955Asset
      Retirement Obligations (Note 8)
              
              
              244,401
              
              
              
              151,814Deferred
      Income Taxes (Note 9)
              
              
              52,000
              
              
              
              57,0001,856,685
              
              
              
              2,622,32Shareholders'
      EquityShare
      Capital (Note 10):Authorized
      300,000,000 Common Shares Par Value.001 Each; Issued and Outstanding108,023,998 (2007 – 106,692,498) Shares
              
              
              108,024
              
              
              
              106,692Additional
      Paid in Capital
              
              
              42,535,255
              
              
              
              39,143,392Other
      Comprehensive Loss
              
              
              (411,013
              )
              
              
              (342,201
              )Deficit
      Accumulated during the Exploration Stage
              
              
              (7,874,783
              )
              
              
              (6,839,439
              )34,357,483
              
              
              
              32,068,444Total
      Liabilities and Equity
              
              $
              36,214,168
              
              
              
              34,690,768
 (See
accompanying notes to the consolidated financial
statements)
 Contingencies
and commitments (Note 13)
 Subsequent
events (Note 18)
  3
 
 KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Shareholders’ Equity
 Six
Months Ended June 30, 2008
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 
 Number
      of Common Shares
              
              
              Amount
              
              
              Additional
      Paid in Capital
              
              
              Deficit
      Accumulated During the Exploration Stage
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              Shares
      Issuable
              
              
              Total
      Shareholders’ EquityBalance
      at December 31, 2007
              
              
              106,692,498
              
              
              $
              106,692
              
              
              $
              39,143,392
              
              
              $
              (6,839,439
              )
              
              $
              (342,201
              )
              
              $
              -
              
              
              $
              32,068,444Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,
      035,344
              
              
              
              -
              
              
              
              -
              
              
              
              1,035,344Foreign
      currency translation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (68,812
              )
              
              
              
              
              
              
              (68,812
              )-
              
              
              
              -
              
              
              
              -
              
              
              
              1,035,344
              
              
              
              (68,812
              )
              
              
              
              
              
              
              1,104,156Common
      shares issued
              
              
              1,331,500
              
              
              
              1,332
              
              
              
              3,036,258
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              3,037,590Stock-based
      Compensation
              
              
              -
              
              
              
              -
              
              
              
              355,605
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              355,605Balance
      at June 30, 2008
              
              
              108,023,998
              
              
              $
              108,024
              
              
              $
              42,535,255
              
              
              $
              (7,874,783
              )
              
              $
              (411,013
              )
              
              
              
              
              
              $
              34,357,483
 (See
accompanying notes to the  consolidated financial statements)
  4
  Kodiak
Energy Inc.
 Unaudited
Consolidated Statements of Operations
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 CumulativeThree
      Months
                
                
                Three
      Months
                
                
                Six
      Months
                
                
                Six
      Months
                
                
                Since
      InceptionEnded
      June 30,
                
                
                Ended
      June 30,
                
                
                Ended
      June 30,
                
                
                Ended
      June 30,
                
                
                Apr.
      7, 2004 to2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                June
      30, 2008INCOME
      DURING THE EVALUATION PERIOD
                
                $
                46
                
                
                $
                42
                
                
                $
                46
                
                
                $
                427
                
                
                $
                27,405EXPENSESOperating
                
                
                4,999
                
                
                
                964
                
                
                
                5,273
                
                
                
                11,600
                
                
                
                39,388General
      and Administrative
                
                
                557,918
                
                
                
                559,477
                
                
                
                1,070,083
                
                
                
                853,989
                
                
                
                4,941,658Stock-based
      Investor Relations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                337,500Depletion,
      Depreciation and Accretion
                
                
                13,573
                
                
                
                12,622
                
                
                
                25,277
                
                
                
                22,143
                
                
                
                1,752,374Including
      Ceiling Test ImpairmentWrite-downsInterest
                
                
                1,257
                
                
                
                18,818
                
                
                
                1,257
                
                
                
                18,818
                
                
                
                904,151577,747
                
                
                
                591,881
                
                
                
                1,101,890
                
                
                
                906,550
                
                
                
                7,975,071Loss
      Before Other Expenses
                
                
                (577,701
                )
                
                
                (591,839
                )
                
                
                (1,101,844
                )
                
                
                (906,123
                )
                
                
                (7,947,666
                )Other
      Expenses (Income)Loss
      from valuation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,000Interest
      Income
                
                
                4,514
                
                
                
                267
                
                
                
                61,500
                
                
                
                509
                
                
                
                149,883(4,514
                )
                
                
                (267
                )
                
                
                (61,500
                )
                
                
                (509
                )
                
                
                124,883Net
      Loss before taxes
                
                
                (573,187
                )
                
                
                (591,572
                )
                
                
                (1,040,344
                )
                
                
                (905,614
                )
                
                
                (7,822,783
                )Deferred
      Income Taxes (Recovery)
                
                
                
                
                
                
                55,480
                
                
                
                (5,000
                )
                
                
                55,480
                
                
                
                52,000NET LOSS
                
                $
                (573,187
                )
                
                $
                (647,052
                )
                
                $
                (1,035,344
                )
                
                $
                (961,094
                )
                
                $
                (7,874,783
                )
  (See
accompanying notes to the consolidated financial statements)
 Loss per
share data (Note 12)
  5
  KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Cash Flows
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 
 Three
      Months
                Ended
      June 30, 2008
              
              
              Three
      Months Ended June 30, 2007
              
              
              Six
      Months Ended June 30, 2008
              
              
              Six
      Months Ended June 30, 2007
              
              
              Cumulative
                Since
      Inception April 7, 2004 to
                June
      30, 2008Operating
      ActivitiesNet Loss
              
              $
              (573,187
              )
              
              $
              (647,052
              )
              
              $
              (1,035,344
              )
              
              $
              (961,094
              )
              
              $
              (7,874,783
              )Adjustments
      to reconcile net loss tonet cash used in operating activities:Depletion, Depreciation and Accretion
              
              
              13,573
              
              
              
              12,622
              
              
              
              25,277
              
              
              
              22,143
              
              
              
              1,752,374Non-cash Interest Expense
              
              
              -
              
              
              
              18,818
              
              
              
              -
              
              
              
              18,818
              
              
              
              808,811Stock-Based Investor Relations Expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              337,500Stock-Based Compensation
              
              
              165,469
              
              
              
              155,269
              
              
              
              355,605
              
              
              
              279,083
              
              
              
              1,068,708Deferred Income Taxes (Recovery)
              
              
              -
              
              
              
              55,480
              
              
              
              (5,000
              )
              
              
              55,480
              
              
              
              52,000Bad Debts Written Off
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,908Contributions to Capital
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              900Non-Cash
      Working Capital Changes (Note 17)
              
              
              12,873
              
              
              
              31,000
              
              
              
              616,337
              
              
              
              (79,188
              )
              
              
              87,014Net
      Cash Used In Operating Activities
              
              
              (381,272
              )
              
              
              (373,863
              )
              
              
              (43,125
              )
              
              
              (664,758
              )
              
              
              (3,755,568
              )Investment
      Activities:Additions To Capital Assets
              
              
              (5,583,591
              )
              
              
              (3,227,253
              )
              
              
              (10,857,261
              )
              
              
              (4,895,363
              )
              
              
              (21,217,261
              )Additions To Other Assets
              
              
              (2,981
              )
              
              
              (4,508
              )
              
              
              13,050
              
              
              
              (5,220
              )
              
              
              (346,303
              )Net
      Cash Used In Investment Activities
              
              
              (5,586,572
              )
              
              
              (3,231,761
              )
              
              
              (10844,211
              )
              
              
              (4,900,583
              )
              
              
              (21,563,564
              )Financing
      ActivitiesFinancing
      Activities
                Shares
      Issued and Issuable
              
              
              2,897,184
              
              
              
              1,711,098
              
              
              
              2,774,122
              
              
              
              3,446,026
              
              
              
              26,420,847Long
      term liabilities
              
              
              311
              
              
              
              3,000,000
              
              
              
              (64,057
              )
              
              
              3,000,000
              
              
              
              46,898Net
      Cash Provided By Financing  Activities
              
              
              2,897,495
              
              
              
              4,711,098
              
              
              
              2,710,065
              
              
              
              6,446,026
              
              
              
              26,467,745
 Foreign
      Currency Translation
              
              
              10,408
              
              
              
              (65,482
              )
              
              
              (68,812
              )
              
              
              (65,593
              )
              
              
              (411,013
              )Net
      Cash Increase (Decrease)
              
              
              (3,059,941
              )
              
              
              1,039,992
              
              
              
              (8,246,083
              )
              
              
              815,092
              
              
              
              737,599Cash
      beginning of period
              
              
              3,797,540
              
              
              
              223,446
              
              
              
              8,983,682
              
              
              
              448,346
              
              
              
              -Cash
      end of period
              
              $
              737,599
              
              
              $
              1,263,438
              
              
              $
              737,599
              
              
              $
              1,263,438
              
              
              $
              737,599Cash
      is comprised of:Balances
      with banks
              
              $
              737,599
              
              
              $
              1,263,438
              
              
              $
              737,599
              
              
              $
              1,263,468
              
              
              $
              737,599Short-term
      deposits
              
              $
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              737,599
              
              
              $
              1,263,438
              
              
              $
              737,599
              
              
              $
              1,263,468
              
              
              $
              737,599
 
 (See
accompanying notes to the consolidated financial statements)
  6
  KODIAK
ENERGY, INC.
 NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 For the
Six Months Ended June 30, 2008 and 2007
 Stated in
US dollars
 
 
 1.   ORGANIZATION,
BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY
 
 The
accompanying consolidated financial statements include the accounts of Kodiak
Energy Inc. and subsidiaries (collectively “Kodiak”, the “Company”, “we”, “us”
or “our”) as at June 30, 2008  and December 31, 2007 and for the three
and six months ended June 30, 2008 and 2007 and for the cumulative period from
April 7, 2004 (inception) until June 30, 2008, and are presented in accordance
with generally accepted accounting principles in the United States of America
(“U. S. GAAP”).
 
 The
Company was incorporated under the laws of the state of Delaware on December 15,
1999 under the name “Island Critical Care, Corp.” with authorized common stock
of 50,000,000 shares with a par value of $0.001. On December 30, 2004 the name
was changed to “Kodiak Energy, Inc.” and the authorized common stock was
increased to 100,000,000 shares with the same par value. On January 17, 2005 the
Company affected a reverse split of 100 outstanding shares for one share. These
consolidated financial statements have been prepared showing post split shares
from inception. The Company was engaged in the development of the manufacture
and distribution of medical instrumentation and it became inactive after the
bankruptcy outlined below. During 2006, the Company increased its authorized
capital to 300,000,000 common shares.
 
 The
Company is in the exploration stage and its efforts have been principally
devoted to the raising of capital, organizational infrastructure development,
the acquisition of oil and gas properties and the initial stages of exploration
to establish reserves for the purpose of future extraction of
resources.
 
 Bankruptcy
 
 On
February 5, 2003 the Company filed a petition for bankruptcy in the District of
Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713,
Estate No. 51-104460, titled “Island Critical Care Corp.”. The Company emerged
from bankruptcy pursuant to a Bankruptcy Court Order entered on April 7, 2004
with no remaining assets or liabilities and adopted Fresh Start
Accounting.
 
 The terms
of the bankruptcy settlement included the authorization for the issuance of
150,000 post split restricted common shares in exchange for $25,000, which was
paid into the bankruptcy court by the recipient of the shares.
 
 The
Company emerged from bankruptcy as an exploration stage company.
 
  7
  Going Concern
Uncertainty
 
 These
consolidated financial statements have been prepared assuming the Company will
continue as a going concern, which presumes the realization of assets and
discharge of liabilities in the normal course of business for the foreseeable
future. The Company has not generated positive cash flow since inception and has
incurred operating losses and will need additional working capital for
completion of its planned 2008 and future programs. These conditions raise doubt
about the Company’s ability to continue as a going concern. Continuation of the
Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. The management of the Company has
developed a strategy to address this uncertainty, including additional equity
and/or debt financing; however, there are no assurances that any such financing
can be obtained on favorable terms, if at all, or that the Company will generate
positive cash flow. These financial statements do not reflect the adjustments or
reclassification of assets and liabilities that would be necessary if the
Company were unable to continue its operations.
 
 2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Kodiak Petroleum ULC, Kodiak Petroleum (Montana),
Inc., and Kodiak Petroleum (Utah), Inc. In British Columbia, Canada, the Company
operates under the assumed name of Kodiak Bear Energy, Inc. All intercompany
accounts and transactions have been eliminated.
 
 Use of Estimates in the
Preparation of Financial Statements
 
 The
preparation of financial statements in conformity with U. S. GAAP requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from actual results.
Included in these estimates are assumptions about allowances for valuation of
deferred tax assets. Accounts receivable are stated after evaluation as to their
collectability and an appropriate allowance for doubtful accounts is provided
where considered necessary. The provision for asset retirement obligation,
depletion, as well as management’s impairment assessment on its oil and gas
properties and other long lived assets are based on estimates and by their
nature, these estimates are subject to measurement uncertainty and the effect on
the financial statements of changes in these estimates, in future periods, could
be significant. These estimates and assumptions are reviewed periodically and,
as adjustments become necessary, they are reported in earnings in the periods in
which they become known.
 
 Joint Venture
Operations
 
 In
instances where the Company’s oil and gas activities are conducted jointly with
others, the Company’s accounts reflect only its proportionate interest in such
activities.
  8
 
 Cash and Short-term
Deposits
 
 Cash
consists of balances with financial institutions and investments in money market
instruments, which have terms to maturity of three months or less at time of
purchase.
 
 Oil and Gas
Properties
 
 Under the
full cost method of accounting for oil and gas operations, all costs associated
with the exploration for and development of oil and gas reserves are capitalized
on a country-by-country basis. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells,
production equipment and overhead charges directly related to acquisition,
exploration and development activities. Proceeds from the sale of oil and gas
properties are applied against capitalized costs with no gain or loss
recognized, unless such a sale would significantly alter the rate of depletion
and depreciation in a particular country, in which case a gain or loss on
disposal is recorded.
 
 Capitalized
costs within each country are depleted and depreciated on the unit-of-production
method based on the estimated gross proved reserves as determined by independent
petroleum engineers. Oil and gas reserves and production are converted into
equivalent units on the basis of 6,000 cubic feet of natural gas to one barrel
of oil. Depletion and depreciation is calculated using the capitalized costs,
including estimated asset retirement costs, plus the estimated future costs to
be incurred in developing proved reserves, net of estimated salvage
value.
 
 An
impairment loss is recognized in net earnings if the carrying amount of a cost
center exceeds the “cost center ceiling”. The carrying amount of the cost center
includes the capitalized costs of proved oil and natural gas properties, net of
accumulated depletion and deferred income taxes and the cost center ceiling is
the present value of the estimated future net cash flows from proved oil and
natural gas reserves discounted at ten percent (net of related tax effects) plus
the lower of cost or fair value of unproved properties included in the costs
being amortized (and/or the costs of unproved properties that have been subject
to a separate impairment test and contain no probable reserves).
 
 Costs of
acquiring and evaluating unproved properties and major development projects are
initially excluded from the depletion and depreciation calculation until it is
determined whether or not proved reserves can be assigned to such properties.
Costs of unproved properties and major development projects are transferred to
depletable costs based on the percentage of reserves assigned to each project
over the expected total reserves when the project was initiated. These costs are
assessed periodically to ascertain whether impairment has occurred.
  9
  Property and
Equipment
 
 Property
and equipment is recorded at cost. Depreciation of assets is provided by use of
a declining balance method over the estimated useful lives of the related
assets. Expenditures for replacements, renewals, and betterments are
capitalized. Maintenance and repairs are charged to operations as
incurred.
 
 Asset Retirement
Obligations
 
 The
Company recognizes a liability for asset retirement obligations in the period in
which they are incurred and in which a reasonable estimate of such costs can be
made. Asset retirement obligations include those legal obligations where the
Company will be required to retire tangible long-lived assets such as producing
well sites. The asset retirement obligation is measured at fair value and
recorded as a liability and capitalized as part of the cost of the related
long-lived asset as an asset retirement cost. The asset retirement obligation
accretes until the time the asset retirement obligation is expected to settle
while the asset retirement costs included in oil and gas properties are
amortized using the unit-of-production method.
 
 Amortization
of asset retirement costs and accretion of the asset retirement obligation are
included in depletion, depreciation and accretion. Actual asset retirement costs
are recorded against the obligation when incurred. Any difference between the
recorded asset retirement obligations and the actual retirement costs incurred
is recorded in depletion, depreciation and
 accretion.
 
 Environmental
 
 Oil and
gas activities are subject to extensive federal, provincial, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites.
 
 Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated. To date, the Company has not recognized any environmental obligations
as production has been insignificant and we have not actively produced since
October, 2006.
  10
  Income
Taxes
 
 Income
taxes are determined using the liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. In addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.
 
 Per FASB
Interpretation (FIN 48) (See Note 3) under the liability method, it is the
Company’s policy to provide for uncertain tax positions and the related interest
and penalties based upon management’s assessment of whether a tax benefit is
more likely than not to be sustained upon examination by tax authorities. At
June 30, 2008, the Company believes it has appropriately accounted for any
unrecognized tax benefits. To the extent the Company prevails in matters for
which a liability for an unrecognized benefit is established or is required to
pay amounts in excess of the liability, the Company’s effective tax rate in a
given financial statement period may be affected. Interest and penalties
associated with the Company’s tax positions are recorded as Interest
Expense.
 
 Stock-Based
Compensation
 
 The
Company records compensation expense in the Consolidated Financial Statements
for share based payments using the fair value method pursuant to Financial
Accounting Standards Board Statement (“FASB”) No. 123R. The fair value of
share-based compensation to employees will be determined using an option pricing
model at the time of grant. Fair value for common shares issued for goods or
services rendered by non-employees are measured based on the fair value of the
goods or services received. Stock-based compensation expense is included in
general and administrative expense with a corresponding increase to Additional
Paid in Capital. Upon the exercise of the stock options, consideration paid
together with the previously recognized Additional Paid in Capital is recorded
as an increase in share capital.
 
 Foreign Currency
Translation
 
 The
functional currency for the Company’s foreign operations is the Canadian dollar.
The translation from the applicable foreign currencies to U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date, while income, expenses and cash flows are translated at
the average exchange rates for the period. The resulting translation adjustments
are recorded as a component of other comprehensive income. Gains or losses
resulting from foreign currency transactions are included in other
income/expenses.
  11
  Revenue
Recognition
  Revenues
from the sale of petroleum and natural gas are recorded when title passes from
the Company to its petroleum and/or natural gas purchaser and collectability is
reasonably assured. The Company will begin recording revenue once it is
determined there are proved reserves.
 
 Loss Per Common
Share
 
 Basic
earnings/loss per common share is computed by dividing net earnings/loss by the
weighted average number of common shares outstanding for the period. Diluted
earnings/loss per common share is computed after giving effect to all dilutive
potential common shares that were outstanding during the period. Dilutive
potential common shares consist of incremental shares issuable upon exercise of
stock options and warrants, contingent stock, conversion of debentures and
preferred stock outstanding. The dilutive effect of potential common shares is
not considered in the EPS calculations for these periods if the impact would
have been anti-dilutive.
 
 
 3.  RECENT
ACCOUNTING PRONOUNCEMENTS
 
 FASB
Interpretation No. 48, “Accounting for Uncertainty in Income taxes – an
interpretation of FASB Statement No. 109 (FIN 48). In July 2006, the FASB issued
FIN 48, which provides guidance on accounting for income tax positions about
which the Company has concluded there is a level of uncertainty with respect to
the recognition of a tax benefit in the Company’s financial statements. FIN 48
describes the minimum recognition threshold a tax position is required to meet.
Tax positions are defined very broadly and include not only tax deductions and
credits but also decisions not to file in a particular jurisdiction, as well as
the taxability of certain transactions.
 
 Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. There was not a material impact on the
Company’s consolidated financial position and results of operations as a result
of the adoption of the provisions of FIN 48. At June 30, 2008, the Company had
no significant unrecognized tax positions and the Company does not believe there
will be any material changes in its unrecognized tax positions over the next
twelve months.
 
 The
Company’s tax positions are subject to examination by tax authorities. As at
June 30, 2008, the Company’s tax years 2005 to present are open for United
States – Federal and State jurisdictions and Canada – Federal and Provincial
jurisdictions.
  12
  The
following new accounting standards have been issued, but have not yet been
adopted by the Company:
 
 In
November, 2007, FASB issued SFAS No. 141(R), Business Combination. FAS 141(R)
will change how business acquisitions are accounted for and will impact
financial statements both on the acquisition date and in subsequent periods. FAS
141(R) is effective for both public and private companies for fiscal years
beginning on or after December 15, 2008. FAS 141(R) will be applied
prospectively. Early adoption is prohibited. The Company has not yet determined
this pronouncement’s potential impact.
 
 Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”
(SFAS No. 157). In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No 157 does not require
any new fair value measurements. However, in some cases, the application of SFAS
No. 157 may change the Company’s current practice for measuring and disclosing
fair values under other accounting pronouncements that require or permit fair
value measurements. Under SFAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer an liability in an
orderly transaction between market participants in the principal or most
advantageous market. The standard clarifies that fair value should be based on
the assumptions market participants would use when pricing the asset or
liability. In February, the FASB issued Staff Position No 157-2, “Effective Date
of FASB Statement No. 157” (“FSP FAS 157-2”), which delays the effective date of
SFAS No. 157 for all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value in the Financial statements on a recurring
basis until fiscal years beginning after November 15, 2008. The Company adopted
the provisions of SFAS No. 157 for assets and liabilities recognized at fair
value on a recurring basis effective January 1, 2008. The partial adoption of
SFAS No. 157 did not have a material impact on the Company’s Financial
Statements. We do not currently anticipate that full adoption in 2009 will
materially impact the Company’s results of operations or financial
condition.
 
 SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159). In February 2007, the FSAB issued SFAS No. 159, which permits
entities to choose to measure many new financial instruments and certain other
items at fair value. The Comapany adopted SFAS No. 159 effective January 1,
2008, and did not elect the fair value option for any existing
items.
  13
  4.  ACCOUNTS
RECEIVABLE
 
 Accounts
receivable consist of the following:
 June
              
              
              December30,
      2008
              
              
              31,
      2007Non-operating
      Partner joint venture accounts
              
              $
              63,888
              
              
              $
              454,179Operator
      cash call advances
              
              
              -
              
              
              
              76,388Government
      of Canada Goods and Services Tax Claims
              
              
              131,573
              
              
              
              621,254Accrued
      interest receivable
              
              
              -
              
              
              
              57,096Amount
      due from Brink Energy Ltd. (Note 18)
              
              
              980,681
              
              
              
              -Amount
      due from warrant holder on exercise of warrants
              
              
              180,000
              
              
              
              -Other
              
              
              3,476
              
              
              
              5,336$
              1,359,618
              
              
              $
              1,214,253
 
 
 5.  OTHER
ASSETS
 
 Other
assets represent long term deposits required by regulatory authorities for
environmental obligations relating to well abandonment and site restoration
activities.
 
 June
              
              
              December30,
      2008
              
              
              
              31,
      2007Alberta
      Energy and Utility Board Drilling Deposit
              
              $
              86,631
              
              
              $
              87,518Alberta
      Energy Royalty Deposit
              
              
              -
              
              
              
              4,723British
      Columbia Oil and Gas Commission Deposit
              
              
              259,672
              
              
              
              267,112$
              346,303
              
              
              $
              359,353
  14
  6.
CAPITAL ASSETS
 Cost
              
              
              Accumulated
      Depreciation and Depletion
              
              
              Net
      Book Value June 30, 2008Oil
      and Gas Properties:Canada
              
              $
              24,972,263
              
              
              $
              1,651,037
              
              
              $
              23,321,226United
      States
              
              
              10,245,994
              
              
              
              -
              
              
              
              10,245,994Sub-total
              
              
              35,218,257
              
              
              
              1,651,037
              
              
              
              33,567,220Furniture
      and Fixtures
              
              
              148,635
              
              
              
              68,348
              
              
              
              80,287Total
              
              $
              35,366,892
              
              
              $
              1,719,385
              
              
              $
              33,647,507Cost
              
              
              Accumulated
      DepreciationAnd
      Depletion
              
              
              Net
      Book Value December 31,
      2007Oil
      and gas Properties:Canada
              
              $
              18,595,042
              
              
              $
              1,651,037
              
              
              $
              16,944,005United
      States
              
              
              7,023,346
              
              
              
              -
              
              
              
              7,023,346Sub-total
              
              
              25,618,388
              
              
              
              1,651,037
              
              
              
              23,967,351Furniture
      and Fixtures
              
              
              128,412
              
              
              
              52,758
              
              
              
              75,654Total
              
              $
              25,746,800
              
              
              $
              1,703,795
              
              
              $
              24,043,005
  During
the six months ended June 30, 2008, the Company has capitalized $116,214
(December 31, 2007 - $ 193,173) of general and administrative personnel costs
attributable to acquisition, exploration and development
activities.
  15
  Unproved
Properties
 
 Included
in oil and gas properties are the following costs related to Canadian and United
States unproved properties, valued at cost, that have been excluded from costs
subject to depletion.
 
 June
              
              
              December30, 2008
              
              
              31, 2007CanadaLand
      acquisition and retention
              
              $
              11,647,327
              
              
              $
              9,284,017Geological
      and geophysical costs
              
              
              10,231,402
              
              
              
              6,371,954Exploratory
      drilling
              
              
              1,235,015
              
              
              
              1,114,763Tangible
      equipment and facilities
              
              
              67,518
              
              
              
              127,217Other
              
              
              139,964
              
              
              
              46,054$
              23,321,226
              
              
              $
              16,944,005United
      StatesLand
      acquisition and retention
              
              $
              6,789,173
              
              
              $
              6,206,389Geological
      and geophysical costs
              
              
              929,748
              
              
              
              383,800Exploratory
      drilling
              
              
              2,396,504
              
              
              
              409,246Tangible
      equipment and facilities
              
              
              50,760
              
              
              
              -Other
              
              
              79,809
              
              
              
              23,911$
              10,245,994
              
              
              $
              7,023,346$
              33,567,220
              
              
              $
              23,967,351
 
 In
Canada, winter drilling programs are planned for 2008-10 for our North West
Territories property and a stimulation and horizontal drilling program is
planned for our British Columbia property. In the United States, an initial
seismic and drilling program has been conducted on our New Mexico property with
additional drilling to follow. These planned activities, when completed, will
enable the Company to evaluate the economic viability of these properties. It is
estimated by management that the unproved property costs associated with these
properties, which in the aggregate constitutes approximately $32,200,000 of our
total unproved property costs as at June 30, 2008, will be included in costs
subject to depletion by 2010.
 
 Ceiling
Test
 
 The
Company has performed ceiling tests for its Canadian and United States
geographical cost centers and has determined that no impairment exists as at
June 30, 2008. As at December 31, 2007, the carrying value of the Company’s
unproved properties in its Canadian and United States cost centers were assessed
by management and costs attributable to certain Canadian cost center properties
were determined to be unsupportable. Consequently, a ceiling test impairment
write-down as of December 31, 2007 of $174,380 was recorded and included in
depletion, depreciation and accretion for 2007. No impairment existed in the
United States cost center as at December 31, 2007.
  16
  7.  LONG
TERM LIABILITIES
 
 As at
June 30, 2008, the Company held $ 46,898 (December 31, 2007 - $110,955) in funds
advanced by partners for their share of a drilling deposit required to be lodged
by the Company with the British Columbia Oil and Gas Commission (See Note 5) as
security for future well abandonment and site restoration
activities.
 
 
 8. ASSET
RETIREMENT OBLIGATIONS
 
 Changes
in the carrying amounts of the asset retirement obligations associated with the
Company’s oil and natural gas properties are as follows:
 
 Asset
      Retirement Obligations, December 31, 2007
              151,814Obligations
      incurred
              82,914Accretion
              9,673Asset
      retirement obligations, June 30, 2008
              244,401
 
 At June
30, 2008, the estimated total undiscounted amount required to settle the asset
retirement obligations was $ 386,654 (December 31, 2007 - $213,880). These
obligations will be settled at the end of the useful lives of the underlying
assets, which currently extends up to 8 years into the future. This amount has
been discounted using a credit adjusted risk-free interest rate of 7.5% and a
rate of inflation of 2.5%.
 
 
 9.
DEFERRED INCOME TAXES
  At June
30, 2008, the Company's deferred tax asset is attributable to its net operating
loss carry forward of approximately $16,414,000 (December 31, 2007 -
$11,191,000), which will expire if not utilized in the years 2024 to 2028. Of
this amount, approximately $408,000 (December 31, 2007 - $402,000) is
attributable to the Company's Canadian operations. As reflected below, this
benefit has been fully offset by a valuation allowance based on management's
determination that it is not more likely than not that some or all of this
benefit will be realized.
  For the
periods ended June 30, 2008, June 30, 2007 and for the cumulative period April
7, 2004 (Date of Inception) to June 30, 2008, a reconciliation of income tax
benefit at the U.S. federal statutory rate to income tax benefit at the
Company's effective tax rates is as follows:
  2008
              
              
              2007
              
              
              CumulativeIncome
      tax benefit at statutory rate
              
              $
              (360,000
              )
              
              $
              316,000
              
              
              $
              2,857,000Permanent
      Differences
              
              
              2,000
              
              
              
              (47,000
              )
              
              
              (408,000
              )State
      tax benefit, net of federal taxes
              
              
              216,000
              
              
              
              (17,000
              )
              
              
              269,000Foreign
      taxes, net of federal benefit
              
              
              (5,000
              )
              
              
              (55,480
              )
              
              
              (44,000
              )Change
      in valuation allowance
              
              
              (578,000
              )
              
              
              (252,000
              )
              
              
              (2,726,000
              )Income
      tax recovery (expense)at effective rate
              
              $
              (5,000
              )
              
              
              (55,480
              )
              
              $
              (52,000
              )
  17
  Deferred
tax assets (liabilities) at June 30, 2008 and December 31, 2007 are comprised of
the following:
 
 2008
              
              
              2007Deferred
      tax assetsDeferred
      costs
              
              $
              -
              
              
              $
              -Deferred deduction on stock-based Compensation
    expense
              
              
              374,000
              
              
              
              249,000Net operating loss carryover
              
              
              6,096,000
              
              
              
              4,053,000Total deferred tax asset
              
              
              6,470,000
              
              
              
              4,302,000Deferred
      tax liabilitiesExcess of U.S. tax deductions over book amounts written
off
              
              
              3,744,000
              
              
              
              2,154,000Net
      deferred tax asset before valuation allowance
              
              
              2,726,000
              
              
              
              2,148,000Less
      valuation allowance for net deferred tax asset
              
              
              (2,726,000
              )
              
              
              (2,148,000
              )Net
      deferred tax asset
              
              $
              -
              
              
              $
              -Canadian
      deferred tax liability resulting from flow-through share expenditures
      renounced
              
              $
              52,000
              
              
              $
              57,000
 
 
 10.  SHARE
CAPITAL AND ADDITIONAL PAID IN CAPITAL
 
 Authorized:
 June 30,
2008 and December 31, 2007 – 300,000,000 common shares at $0.001 par
value
 
 The
following share capital transactions occurred during the periods:
 
 Issued
              
              Number
              
              
              Par
      Value
              
              
              Additional
      Paid in CapitalBalance
      December 31, 2007
              
              
              106,692,498
              
              
              $
              106,692
              
              
              $
              39,143,392Share
      Issue Costs (a)
              
              
              -
              
              
              
              -
              
              
              
              (9,594
              )Private
      Placement, net of costs (b)
              
              
              1,204,000
              
              
              
              1,204
              
              
              
              2,854,730Warrant
      converted to common shares (c)
              
              
              127,500
              
              
              
              128
              
              
              
              191,122Stock-based
      compensation (Note 11)
              
              
              -
              
              
              
              -
              
              
              
              355,605Balance
      June 30, 2008
              
              
              108,023,998
              
              
              $
              108,024
              
              
              $
              42,535,255
 
 (a)
              During
      the six months ended June 30, 2008, the Company paid $9,594 in share issue
      costs which related to common shares issued in 2007.
 (b)
              On
      June 18, 2008, the Company closed a private placement for an aggregate of
      1,204,000 units at a price of US$2.50 per unit, for gross proceeds of
      $3,010,000 and share issue costs aggregating $154,066. Each unit consisted
      of one common share and one warrant which entitles the holder to purchase,
      until June 18, 2010, one common share of the Company at a price per share
      of $3.50. In connection with 1,200,000 shares of this private placement,
      an agent was granted warrants to purchase, until June 18, 2010, 96,000
      common shares of the Company at $3.50 per common
  share.
 (c)
              In
      June, 2008, warrant holders converted 127,500 warrants into 127,500 common
      shares at $1.50 per share.
  18
  The
following common shares were reserved for issuance:
  Exercise
      Price ($)
              
              
              Equivalent
      Shares Outstanding
              
              
              Weighted
      Average Years to Expiry
              
              
              Option
      Shares VestedStock
      Options (see summary below)
              
              $
              1.28-$2.74
              
              
              
              1,926,666
              
              
              
              3.84
              
              
              
              601,667Warrants
      (see summary below)
              
              $
              2.50-$3.50
              
              
              
              6,123,014
              
              
              
              1.45
              
              
              
              -Thunder
      Acquisition (Note 13)
              
              
              
              
              
              
              11,000,000
              
              
              
              
              
              
              
              -Total Shares Reserved
              
              
              
              
              
              
              18,953,680
              
              
              
              
              
              
              
              -
 
 Stock Option
Plan
 
 The
Company has a stock option plan under which it may grant options to its
directors, officers, employees and consultants for up to a maximum of 10% of its
issued and outstanding common shares at market price at the date of grant for up
to a maximum term of five years. Options are exercisable equally over the first
three years of the term of the option.
 
 A summary
of options granted under the plan is as follows:
 Expiry
      Date
              
              Number
      of Option Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Total
      ValueGranted
      to five directors and one officer Oct. 23, 2006
              
              Oct.
      23/11
              
              
              1,280,000
              
              
              $
              1.50
              
              
              $
              1,920,000Cancellation
      of one officer’s option
              
              
              
              
              (280,000
              )
              
              $
              1.50
              
              
              
              (420,000
              )Granted
      to an employee Dec. 1, 2006
              
              Dec.
      1/11
              
              
              125,000
              
              
              $
              1.28
              
              
              
              160,000Balance
      December 31, 2006
              
              
              
              
              1,125,000
              
              
              $
              $
      1.48
              
              
              
              1,660,000Granted
      to an officer Jan. 3, 2007
              
              Jan.
      3/12
              
              
              280,000
              
              
              $
              1.29
              
              
              
              361,200Granted
      to a consultant Feb. 1, 2007
              
              Feb.
      1/12
              
              
              100,000
              
              
              $
              1.35
              
              
              
              135,000Granted
      to three senior advisors Apr. 2, 2007
              
              Apr.12/12
              
              
              300,000
              
              
              $
              1.75
              
              
              
              525,000Granted
      to two consultants Aug. 1, 2007
              
              Aug.
      1/12
              
              
              130,000
              
              
              $
              2.74
              
              
              
              356,200Granted
      to a consultant Dec. 1, 2007
              
              Dec.
      1/12
              
              
              100,000
              
              
              $
              2.58
              
              
              
              258,000Balance
      December 31, 2007
              
              
              
              $
              2,035,000
              
              
              
              1.62
              
              
              $
              3,295,400Granted
      to an employee Mar. 24, 2008
              
              Mar.
      24/13
              
              
              25,000
              
              
              $
              1.86
              
              
              
              46,500Cancellation
      of two senior advisors’ options
              
              
              
              
              (133,334
              )
              
              $
              1.75
              
              
              
              (233,334
              )Balance
      June 30, 2008
              
              
              
              
              1,926,666
              
              
              $
              1.61
              
              
              $
              3,108,566
  19
  Warrants
 
 During
2006, 2007 and 2008, the Company, as part of certain private placement
financings, issued warrants that are exercisable in common shares of the
Company. A summary of such outstanding warrants follows:
 
 Exercise
      Price
              
              Expiry
      Date
              
              Equivalent
      Shares Outstanding
              
              
              Weighted
      Average Years to ExpiryBalance
      December 31, 2006
              
              $
              2.70-$3.50
              
              June
      30/11
              
              
              1,130,000
              
              
              
              3.00Issued
      February 20, 2007
              
              $
              1.50
              
              Feb.
      20/09
              
              
              860,000
              
              
              
              .64Issued
      May 10, 2007
              
              $
              1.50
              
              May
      10/09
              
              
              2,447,900
              
              
              
              .86Issued
      September 28, 2007
              
              $
              2.50
              
              Mar.
      28/09
              
              
              220,480
              
              
              
              .74Issued
      September 28, 2007
              
              $
              3.00
              
              Mar.
      28/09
              
              
              149,334
              
              
              
              .74Issued
      October 3, 2007
              
              $
              3.00
              
              Apr.
      3/09
              
              
              26,800
              
              
              
              .75Issued
      October 30, 2007
              
              $
              2.50
              
              Apr.
      30/09
              
              
              80,000
              
              
              
              .83Issued
      October 30, 2007
              
              $
              3.00
              
              Apr.
      30/09
              
              
              4,000
              
              
              
              .83Issued
      November 1, 2007
              
              $
              2.50
              
              May
      1/09
              
              
              32,000
              
              
              
              .83Total
      Issued in 2007
              
              
              
              
              
              
              
              3,820,514Balance
      December 31, 2007
              
              
              
              
              
              
              
              4,950,514Issued
      June 18, 2008
              
              $
              3.50
              
              Jun.
      18/10
              
              
              1,300,000
              
              
              
              1.95Converted
      upon exercise (Note 10)
              
              $
              1.50
              
              May
      10/09
              
              
              (127,500
              )Balance
      June 30, 2008
              
              
              
              
              
              
              
              6,123,014
              
              
              
              1.45
  20
  11.           STOCK-BASED
COMPENSATION
 
 In
accordance with Financial Accounting Standards Board Statement (“FASB”) No.
123R, the Company uses the Black-Scholes option pricing method to determine the
fair value of each stock option granted and the amount is recognized as
additional expense in the statement of earnings over the vesting period of the
option. The fair value of each option granted has been estimated using the
following average assumptions:
 
 2008
              2007Risk
      free interest rate
              3.99%
              3.99%Expected
      holding period
              3
      years
              3
      yearsShare
      price volatility
              75%
              75%Estimated
      annual common share dividend
              -
              -
 
 For
options granted during the six months ended June 30, 2008, the fair value
totaled $23,750 (December 31, 2007 - $ 1,166,000). The amount of share-based
compensation expense recorded during the six months ended June 30, 2008 is
estimated to be $ 355,605 (December 31, 2007 – $643,934) and has been included
in General and Administrative Expense with a corresponding credit to Additional
Paid in Capital. The balance of the fair value of the options to be expensed in
future periods is $1,039,500 (December 31, 2007 - $1,536,937) over a vesting
period of three years.
 
 12.           NET
INCOME (LOSS) PER SHARE
 
 A
reconciliation of the numerator and denominator of basic and diluted loss per
share is provided as follows:
 
 Three
              
              
              Three
              
              
              Six
              
              
              SixMonths
              
              
              Months
              
              
              Months
              
              
              MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedJune
              
              
              June
              
              
              June
              
              
              June30, 2008
              
              
              
              30, 2007
              
              
              
              30, 2008
              
              
              
              30, 2007Numerator:Numerator for basic and diluted loss per shareNet
      Loss
              
              $
              (573,187
              )
              
              $
              (647,052
              )
              
              $
              (1,035,344
              )
              
              $
              (961,094
              )Denominator:Denominator
      for basic loss per shareWeighted
      average shares outstanding
              
              
              106,856,707
              
              
              
              92,680,982
              
              
              
              106,774,602
              
              
              
              91,728,572In
      the money stock options
              
              
              694,273
              
              
              
              974,332
              
              
              
              632,344
              
              
              
              749,881In
      the money warrants
              
              
              1,263,272
              
              
              
              2,235,826
              
              
              
              1,136,686
              
              
              
              2,406,070Contingent
      Thunder shares
              
              
              4,500,000
              
              
              
              -
              
              
              
              4,500,000
              
              
              
              -Denominator
      for diluted loss per shareWeighted
      average shares outstanding
              
              
              113,314,252
              
              
              
              95,891,140
              
              
              
              113,043,633
              
              
              
              94,884,524Basic
      and diluted loss per share
              
              $
              0.01
              
              
              $
              0.01
              
              
              $
              0.01
              
              
              $
              0.01
 
  21
  13.
COMMITMENTS AND CONTINGENCIES
 
 Thunder Acquisition
Commitments
 
 On
September 28, 2007 the Company purchased from Thunder River Energy, Inc.
(“Thunder”) certain properties in Canada (Exploration License 413 – “EL 413”)
and the United States in consideration for cash and common shares of the
Company. As part of the transaction, the Company committed to issue up to 11
million additional common shares of the Company upon the achievement of certain
milestones in connection with the acquired properties, including 6 million
shares to be issued as follows: 2 million shares upon completion of a 2007/08
seismic program for which such shares were issued in July, 2008; 1 million
shares upon the spudding of a shallow depth well (1,500 meters TD) by March 31,
2009; 1.5 million shares upon the spudding of a medium depth well (2,500 meters
TD) before license expiry in 2009 and 1.5 million shares upon conversion of any
part of EL 413 to a Significant Discovery Lease. An extension to the license
expiry date has been applied for and is expected to be approved. If, as a result
of the Company’s exploration and development activities on the acquired
properties, reserves in place exceed 100 million barrels, then, for each excess
10 million barrels in place, 100,000 additional shares could be issued, up to a
maximum of 5 million additional shares.
 
 Canadian Flow-through Share
Commitments
 
 In
September and October, 2007, 2,251,670 private placement shares were issued at a
purchase price of $3.00 for gross proceeds of $6,755,010 and on the basis that
the Company would provide the investors a Canadian flow through tax deduction.
In order to provide such flow through share tax deduction benefits to the
investors, the Company committed to expend the proceeds on eligible capital
expenditures in Canada prior to December 31, 2008 and renounce such expenditures
to the flow through share investors. In 2008, these expenditures were renounced
effective December 31, 2007 and as of June 30, 2008, eligible expenditures had
been incurred in an amount sufficient to satisfy this commitment.
 
 Potential
Litigation
 
 As of
December 31, 2007, there was a threatened litigation matter which comprised a
potential claim by a partner against the Company regarding the terms of the EL
413 North West Territory farm-out agreement entered into in 2006. A letter of
intent has been signed which will result in Kodiak purchasing the working
interest from the partner, thus, the likelihood of any litigation arising out of
this matter has lessened significantly and it is not expected to result in any
material adverse impact on the Company’s financial position.
  22
  14.           FINANCIAL
INSTRUMENTS
 
 The
Company, as part of its operations, carries a number of financial instruments.
It is management’s opinion that the Company is not exposed to significant
interest, credit or currency risks arising from these financial instruments
except as otherwise disclosed.
 
 The
Company’s financial instruments, including cash and short term deposits,
accounts receivable, accounts payable and accrued liabilities are carried at
values that approximate their fair values due to their relatively short maturity
periods.
 
 15.           RELATED
PARTY TRANSACTIONS
 
 For the
six months ended June 30, 2008, the Company paid $ Nil (2007 - $49,610) to
Sicamous Oil & Gas Consultants Ltd., a company owned by the President and
Chief Executive Officer of the Company for consulting services rendered by him.
These amounts were charged to General and Administrative Expense.
 
 For the
six months ended June 30, 2008, the Company paid $ Nil (2007 - $26,523) to MHC
Corp., a company owned by the former Chief Executive Officer of the Company for
consulting services rendered by him. These amounts were charged to General and
Administrative Expense.
 
 For the
six months ended June 30, 2008, the Company paid $59,685 (2007 – $27,377), to
Harbour Oilfield Consulting Ltd., a company owned by the Vice-President
Operations of the Company for consulting services rendered by him. Of this
amount, $26,555 (2007 - $ Nil) was capitalized to Unproved Oil and Gas
Properties and $33,130 (2007 - $ Nil) was charged to General and Administrative
Expense.
 
 For the
six months ended June 30, 2008, the Company paid $107,467 (2007 - $56,374) to
the Chief Financial Officer of the Company for services rendered by him. These
amounts were charged to General and Administrative Expense.
 
 These
related party transactions were in the normal course of business and agreed to
by the related parties and the Company based on negotiations and Board approval
and accordingly had been measured at the exchange amounts.
 
 As at
June 30, 2008 and December 31, 2007, no other amounts were owing to any related
parties.
  23
  16.           SEGMENTED
INFORMATION
  The
Company’s geographical segmented information is as follows:
 
 Three Months Ended
      June 30, 2008
              Six Months Ended June
      30, 2008
 U. S.
              
              
              Canada
              
              
              Total
              
              
              U. S.
              
              
              Canada
              
              
              TotalIncome
      during the Evaluation Period
              
              $
              -
              
              
              
              46
              
              
              
              46
              
              
              $
              -
              
              
              
              46
              
              
              
              46Net
      Loss (Income)
              
              
              (6,134
              )
              
              
              579,321
              
              
              
              573,187
              
              
              
              (20,840
              )
              
              
              1,056,184
              
              
              
              1,035,344Capital
      Assets
              
              
              10,245,994
              
              
              
              23,401,513
              
              
              
              33,647,507
              
              
              
              10,245,994
              
              
              
              23,401,513
              
              
              
              33,647,507Total
      Assets
              
              
              10,266,176
              
              
              
              25,947,992
              
              
              
              36,214,168
              
              
              
              10,266,176
              
              
              
              25,947,992
              
              
              
              36,214,168Capital
      Expenditures
              
              
              1,435,783
              
              
              
              390,806
              
              
              
              1,826,589
              
              
              
              3,166,750
              
              
              
              6,370,425
              
              
              
              9,537,175
 
 
 Three Months Ended June 30,
      2007
              
              
              SixMonths Ended June 30,
      2007U. S.
              
              
              Canada
              
              
              Total
              
              
              U. S.
              
              
              Canada
              
              
              TotalIncome
      during the Evaluation Period
              
              $
              -
              
              
              
              42
              
              
              
              42
              
              
              $
              -
              
              
              
              427
              
              
              
              427Net
      Loss
              
              
              9,927
              
              
              
              637,125
              
              
              
              647,052
              
              
              
              12,556
              
              
              
              948,538
              
              
              
              961,094Capital
      Assets
              
              
              589,885
              
              
              
              6,945,449
              
              
              
              7,735,334
              
              
              
              589,885
              
              
              
              6,945,449
              
              
              
              7,535,334Total
      Assets
              
              
              678,645
              
              
              
              8,920,708
              
              
              
              9,599,353
              
              
              
              678,645
              
              
              
              8,920,708
              
              
              
              9,599,353Capital
      Expenditures
              
              
              25,050
              
              
              
              1,746,330
              
              
              
              1,771,380
              
              
              
              25,050
              
              
              
              6,190,606
              
              
              
              6,215,656
  24
  17.
CHANGES IN NON-CASH WORKING CAPITAL
  CumulativeSinceThree
              
              
              Three
              
              
              Six
              
              
              Six
              
              
              InceptionMonths
              
              
              Months
              
              
              Months
              
              
              Months
              
              
              April
      7,Ended
              
              
              Ended
              
              
              Ended
              
              
              Ended
              
              
              2004
      toJune
      30,
              
              
              June
      30,
              
              
              June
      30,
              
              
              June
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2008Operating
      Activities:Accounts
      Receivable
              
              $
              (20,157
              )
              
              
              19,030
              
              
              
              628,762
              
              
              
              (23,283
              )
              
              
              (54,924
              )Prepaid
      Expenses and Deposits
              
              
              (5,396
              )
              
              
              3,501
              
              
              
              (15,853
              )
              
              
              (23,268
              )
              
              
              (113,361
              )Accounts
      Payable
              
              
              33,230
              
              
              
              22,835
              
              
              
              54,361
              
              
              
              7,150
              
              
              
              179,237Accrued
      Liabilities
              
              
              5,196
              
              
              
              30,696
              
              
              
              (50,933
              )
              
              
              (39,787
              )
              
              
              51,062Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25,000Total
              
              $
              12,873
              
              
              
              31,000
              
              
              
              616,337
              
              
              
              (79,188
              )
              
              
              87,014Investing
      Activities:The
      total changes in investing activities non-cash working capital accounts
      detailed below pertains to capital asset additions and has been included
      in that caption in the Statement of Cash
Flow:
  Accounts
      Receivable
              
              $
              (779,282
              )
              
              
              145,557
              
              
              
              (594,127
              )
              
              
              217,495
              
              
              
              (1,124,694
              )Prepaid Expenses and
      Deposits
              
              
              (35,687
              )
              
              
              (35,585
              )
              
              
              (16,813
              )
              
              
              (33,631
              )
              
              
              220Accounts
    Payable
              
              
              (401,830
              )
              
              
              46,050
              
              
              
              (421,083
              )
              
              
              954,850
              
              
              
              887,847Accrued
      Liabilities
              
              
              (2,540,058
              )
              
              
              (1,625,342
              )
              
              
              (288,046
              )
              
              
              181,512
              
              
              
              145,242Total
              
              $
              (3,756,857
              )
              
              
              (1,469,320
              )
              
              
              (1,320,069
              )
              
              
              1,320,226
              
              
              
              (91,385
              )Financing Activities:The
      total changes in financing activities non-cash working capital accounts
      detailed below pertains to shares issued and issuable and has been
      included in that caption in the Statement of Cash
  Flow:
  Accounts
      Receivable
              
              $
              (180,000
              )
              
              
              -
              
              
              
              (180,000
              )
              
              
              -
              
              
              
              (180,000
              )Prepaid
      Expenses and Deposits
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,000
              )Accounts
      Payable
              
              
              -
              
              
              
              1,223
              
              
              
              (113,468
              )
              
              
              (28,849
              )
              
              
              -Accrued
      Liabilities
              
              
              30,000
              
              
              
              115,000
              
              
              
              30,000
              
              
              
              220,000
              
              
              
              250,000Convertible
      Debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              (150,000
              )
              
              
              116,223
              
              
              
              (263,468
              )
              
              
              191,151
              
              
              
              60,000
  25
  18.           SUBSEQUENT
EVENTS
  Brink
Acquisition
  On June
19, 2008, the Company entered into an agreement with Brink
Energy Ltd. (“Brink”), a private Alberta oil and gas corporation, with respect
to a proposed plan of arrangement (“Arrangement Agreement”) which will provide
for the Company to acquire all of the outstanding shares of Brink. Under the
proposed plan of arrangement, the holders of common shares of Brink (“Brink
Shares”) will receive for each Brink Share, at the election of the Brink
shareholder, either: (i) 0.411 of a common share of the Company, or (ii) $0.575
plus 0.2055 of a Company share, subject to an aggregate maximum amount of cash
paid to Brink shareholders of Cdn. $7 million. Assuming Brink shareholders elect
to receive the $7 million maximum cash consideration, the balance of the
consideration for the Brink Shares will be paid in Company common shares. The
Company has arranged bank financing under commercial terms for a substantial
part of the cash portion of the acquisition cost. Under certain circumstances,
Brink and the Company have each agreed to pay to the other a non-completion fee
of Cdn. $1 million. The Arrangement Agreement is subject to regulatory and
Alberta court approval and the approval by a majority of at least two-thirds of
Brink shareholders and it is estimated the transaction will close in the fourth
quarter of 2008.
  In
connection with this transaction, the Company has loaned $980,681 (Cdn. $1
million) to Brink, which loan has been utilized by Brink to reduce its bank
indebtedness. The loan to Brink bears interest at prime plus 2% and is secured
by Brink assets and is subordinated to Brink’s bank indebtedness. The loan is
also convertible into common shares of Brink under certain
circumstances.
  Issue of
Shares to Thunder River Energy, Inc.
  In July,
2008, the Company issued 2 million common shares to Thunder River Energy, Inc.
pursuant to its commitments discussed in Commitments and Contingencies Note 13
under “Thunder Acquisition Commitments”.
  26
  ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  Forward Looking
Statements
  From time
to time, we or our representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in, but not limited to, press releases, oral statements made with the
approval of an authorized executive officer or in various filings made by us
with the Securities and Exchange Commission, including this Form 10-Q. Words or
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements". Such statements are qualified
in their entirety by reference to and are accompanied by the above discussion of
certain important factors that could cause actual results to differ materially
from such forward-looking statements.
  Investors
should be aware of factors that could have a negative impact on the Company's
prospects and the consistency of progress in the areas of revenue generation,
liquidity, and generation of capital resources. These include: (i) inability of
the Company to generate revenue and profit from its properties, (ii) possible
inability to attract investors for its equity securities or otherwise raise
adequate funds from any source should the Company seek to do so, (iii) increased
governmental regulation, (iv) increased competition, (v) unfavorable outcomes to
litigation involving the Company or to which the Company may become a party in
the future and, (vi) a very competitive and rapidly changing operating
environment. The risks identified here are not all inclusive. New risk factors
emerge from time to time and it is not possible for management to predict all of
such risk factors, nor can it assess the impact of all such risk factors on the
Company's business or the extent to which any factor or combination of factors
may cause actual results to differ materially from those contained in any
forward-looking statements. Accordingly, forward-looking statements should not
be relied upon as a prediction of actual results.
  The
financial information set forth in the following discussion should be read in
conjunction with management’s discussion and analysis contained in our 2007
Annual Report on Form 10-K as well as the consolidated financial statements and
notes thereto included elsewhere herein.
  27
  Plan of
Operation
  The first
six months of 2008 has been active with substantial development on each of our
three major properties and the initiation of a corporate acquisition which, if
such acquisition closes, will provide the Company with its first long term
reserves and production. See Note 18 to the Consolidated Financial Statements
filed as part of this Form 10-Q discussing the “Brink Acquisition”. During the
next twelve months, the Company plans to continue the development of its asset
base as well as identify additional assets for addition to our overall land
base.
  All
projects to date have been managed on schedule and within budget as the Company
proves to be an effective operator in each jurisdiction in which it operates. In
late 2007, a $17.4 million private placement financing was completed under
difficult market conditions and in December 2007, the Company’s common shares
were listed on the Toronto Venture Exchange in Canada on an aggressive timeline.
The Company expects to finance its future capital expenditure programs with
combinations of debt and equity financings and some divestitures. As of June 30,
2008, the Company has no secured debt. A description of the company’s recent and
planned activities for its core properties is included below.
  Kodiak
Energy, Inc. is a petroleum and natural gas exploration and development company
whose primary objective is to identify, acquire and develop working interests in
undeveloped or underdeveloped petroleum and natural gas prospects. We are
focused on prospects located in Canada and the United States. The prospects we
hold are generally under leases and include partial and full working interests.
In all of our core properties, Kodiak is the operator and majority interest
owner. In two properties, we have the option to perform certain exploratory
drilling to earn additional interests. The prospects are subject to varying
royalties due to the state, province or federal governments and, in some
instances, to other royalty owners in the prospect. None of our core properties
are exposed to the recent Alberta Royalty Review changes.
  The
Company plans to engage in seismic data collection and well drilling programs on
a number of prospects in which it has an interest or right to acquire percentage
interests over the next two years. Drilling programs will be conducted where the
seismic data supports the effort and expense and further drilling will be based
on the results of the initial wells. A number of our prospects are located in
the vicinity of petroleum and natural gas infrastructure, thereby providing the
opportunity to tie-in to existing or planned pipelines. This will be important
in lowering the overall cost of development and marketing any natural resources
located in a prospect.
  The
Company currently has no petroleum or natural gas reserves or production. The
company will begin recording revenue when production from proved reserves
commences.
   28
  Core
Properties
  Canada
  Lucy –
Northern British Columbia
  The
Company is the operator and 80% working interest owner of a 1,920 acre lease
located in Northeastern British Columbia. The company believes the lease is
situated on the southeast edge of the Horn River Basin and the Muskwa Shale gas
prospect. Industry continues to show increased interest in this shale gas play
with several comparisons of the Muskwa Shale gas potential as an analogue of the
Barnett Shale gas potential. Other industry participants continue to acquire
large land positions in this part of British Columbia which are prospective for
this type of play.
  The
Company has been involved in two previous drilling operations on the lease. In
the fourth quarter of 2006, Kodiak farmed in as a non-operated partner, paying
10% to earn 7.5%, on a drilling operation in the Lucy (Gunnell) area. This first
drilling operation, designed to target a Middle Devonian reef prospect, had
several operational problems and was unsuccessful.
  After
performing an internal review of seismic and drilling data, it was determined
there was a seismic anomaly on the southern half of the lease. This anomaly was
identified on several different seismic lines and a decision was made to drill a
well on that part of the lease to evaluate both the anomaly as the primary
target and the Muskwa shale, seen in the first well but not evaluated by the
operator at that time.
  In the
third quarter of 2007, the Company served partners with an independent
operations notice with the intention of increasing its working interest in the
lease. The Company was able to increase its working interest to 80%; however,
that process required a substantial amount of title work, which was recently
completed.
  In the
first quarter of 2008, a second drilling operation was completed and a vertical
well was cased. It was determined that the Middle Devonian seismic anomaly was
not a reef buildup and the wellbore was cased due to encountering significant
gas shows in the Muskwa Shale with a formation thickness of approximately sixty
meters.
  The
Company submitted an application to the British Columbia Oil & Gas
Commission (“OGC”) for an experimental scheme to test the Muskwa Shale gas
potential. As of July 15, 2008, the final day that any external party could file
a notice of objection to the application, no notices had been filed and approval
from the OGC is expected soon.
  Kodiak
contracted an industry-recognized shale gas assessment laboratory to prepare and
analyze the drill cuttings from the 2008 well in order to evaluate the Muskwa
Shale interval for gas potential. The shale gas assessment is conducted by
performing various tests on the rock cuttings that were obtained while drilling
the well in order to determine the type, quality and amount of adsorbed gas and
free gas.
  29
  The most
important conclusion from the drill cutting analysis is that the information
received continues to support the evaluation of Kodiak’s Muskwa (Evie) shale gas
prospect. The laboratory data is consistent with other public industry and
government data on the Muskwa shales. It should also be noted that the numbers
obtained on the laboratory analysis of drill cuttings may be conservative due to
the nature of sampling drill cuttings on a drilling rig. Another significant
point is that all three wells on the Kodiak lease drilled deep enough to
penetrate the Muskwa Shale had elevated gas detector readings while penetrating
the shales.
  The
prospect is still in the early stages of delineation. However, based on well
cuttings and drilling data, Kodiak’s internal technique analysis has estimated
the volume of adsorbed and free gas in the Muskwa (Evie) shales to have a
potential net reserves of 32.8 bcf per section or 98.4 bcf total. We estimate,
based on estimated 20% recovery factor on the three sections of land, a total of
19.7 bcf recoverable contingent resources. In calculating this number, the
Company used all of the laboratory analysis findings and wellbore information
obtained during the drilling operation. For reference, this internally
calculated volume is between the “best” and “high” calculations listed in the
Chapman report that only had the TOC analysis and industry available data.
Further appraisal work is required before these estimates can be finalized and
establish commerciality.
  Pending
the successful approval of the continuation application the company will execute
a multi-phase work program designed to test the deliverability of the Muskwa
shale gas formation using vertical and horizontal drilling and completion
techniques. Kodiak’s proposed work program would allow for early production into
a pipeline in order to monitor long term deliverability rates and pressures of
horizontal and vertical test wells on the periphery of the Horn River
Basin.
  These
results would be some of the first commercial production results for a Horn
River Basin shale gas project and will provide information that will help define
the effective exploration area of the Basin and assist in the validation of
adjoining properties in a divestiture process, should that occur.
  The
current intention is to perform the following work commitments for the license:
target dates are subject to change as new information becomes
available.
  Fourth
Quarter 2008 and First Quarter 2009 - Perforate the Muskwa intervals, perform a
vertical staged fracture treatment, test and evaluate pressures and production
and, if economic, equip and tie in well to pipeline.
  30
  Fourth
Quarter 2009 and First Quarter 2010 – Drill and case a 1000 meter horizontal leg
from an existing cased vertical well on the lease, perform a horizontal staged
fracture treatment, test and evaluate pressures and production and, if economic,
equip and tie in well to pipeline.
  Kodiak
may accelerate the schedule, if the results of the first program are successful
in commercial volumes of gas. In that case, the horizontal test would be
completed in the 2009 winter work season.
  Little
Chicago – Northwest Territories
  The
Company is the operator and largest working interest owner of the 201,160
acre Exploration Licence 413 (“EL 413”)in the Mackenzie River Valley
centered along the planned Mackenzie Valley Pipeline. In 2006, the Company
signed an exploration farm-in agreement with the two 50% working interest owners
of EL 413. The company reprocessed 50 km of existing seismic data in Q4 of
2006 and during the 2006-07 winter work season, the Company expended
approximately $6,500,000 to shoot and acquire 84 km of high resolution 2D
seismic data on the farm-out Lands, thus earning a 12.5% working interest in the
property. In September, 2007, the Company acquired Thunder River Energy, Inc.’s
(“Thunder”) remaining 43.75% in the property giving the Company a 56.25%
interest in EL 413. Recently, a letter of intent was signed with the Company’s
remaining partner in the project that will allow Kodiak to acquire, upon
closing, the balance of the working interest in EL 413 and become a 100% working
interest owner.
  A 2007-08
43 km 2D high resolution seismic program has been completed on the property and
results are being processed and interpreted. This project was completed on
budget and schedule for a total cost of $4.5 million. The initial seismic
results show substantial structural closure and support the planning for a
2008-09 multiple well drilling program. That data was included in an updated
Chapman Prospective Resource report published in May, 2008.
  EL 413
(Little Chicago) has two prospective target reservoirs identified by the 2007
and  2008 seismic and gravity surveys, plus a further deeper target,
yet to be qualified or quantified.  While reviewing core samples and
well information from previous regional drilling operations, Kodiak also
identified a shallow oil reservoir which is an additional prospective
target.
  The
Devonian Bear Rock Prospect (“Bear Rock”) is the first described target and is
located at a shallow depth of approximately 700 meters (2,300 ft.). This
reservoir was previously identified and preliminarily evaluated in the initial
Chapman Report prepared in 2005. The expected product from the reservoir is
light and medium oil, with no consideration to solution gas.
  The
combined seismic obtained during 2007 and 2008 acknowledged a series of pools
distributed throughout the project. The Chapman Report identified fifteen Bear
Rock leads located along the seismic lines with five of them being selected as
well defined high grade Bear Rock leads. This is an increase of 5 additional
leads from the initial 2007 work program. Indicators of these potentially
prolific reservoirs are present along several seismic lines that may imply these
Bear Rock occurrences to be present throughout EL 413.
  31
  The 2007
seismic also identified a pinchout at the top of the Precambrian formation that
overlies the pinchout of the Basal Sand to suggest a hydrocarbon trap. The two
overlying pinchouts present an opportunity for both prospects to be explored.
Additional geophysical work was required to target optimum drilling
locations.
  Thus the
decision to acquire additional seismic in the winter of 2008 as there was an
identified potential to drill both the Devonian Bear Rock and the Basal Cambrian
Sand targets from a common drilling site. This would substantially lower
drilling costs on a per well basis and reduce the overall project
risk.
  The
addition of 2008 seismic to the 2007 seismic further defined a hydrocarbon trap
in the Basal Cambrian Sand sitting on the top of the PreCambrian. This interval,
found at a depth of approximately 2,300 meters (7,545 feet), has never been
regionally penetrated and tested; however, it has been proven as a productive
reservoir in the Colville Hills area approximately 125 kilometers (77 miles)
east of EL 413.  With this additional data, the Chapman Report
identified five drilling locations that will allow the Basal Cambrian Sand and
the top of the Precambrian to be drilled and tested.
  Physical
evidence of hydrocarbons is present with a natural surface oil seep on the
northern edge of the license area on the banks of the Mackenzie River. This
natural occurrence is suggestive of a shallow oil pool, possibly in the Canol
formation, and warrants further investigation. While reviewing core samples and
well logs from previous regional drilling activity. Kodiak was able to map out
the Canol/Imperial formation and determine that it is the likely source of the
natural surface seeps. This prospect will be found on the Northwest quarter of
EL 413 and is at a very shallow depth of approximately 350 meters (1,148
feet).
  Internal
company review has prioritized the drill locations to two high grade locations
that will provide the opportunity to test the Devonian Bear Rock Prospect and
the Basal Cambrian Sand/Precambrian Prospect with the same drill
site.
  It is
anticipated that the first two exploratory wells will be drilled during the
2008/2009 winter drilling season. Work has commenced on preparing the necessary
permitting applications and the Company is currently working on finalizing the
Access and Benefits agreements with the beneficiaries of the land claims – the
Gwich’in and Sahtu.  These agreements are expected to be finalized in
the near future. Part of those negotiations would be a post drilling earning
into the property by the Gwich’in and Sahtu to become a working interest partner
in the license when converted to a significant discovery license.
  In
addition, Kodiak has started the process to extend the EL 413 license. Kodiak
has initiated discussions with regulators and believes the extension is
possible. This will permit an expanded development plan to investigate
additional targets identified in the previous seismic programs.
  32
  The
Company is currently in discussions with other industry partners to share in the
costs of the drilling programs, thus reducing risk and capital commitments.
Financing plans will be finalized when overall partnerships are established.
Kodiak intends on retaining operatorship.
 
 The
Company has demonstrated that it is a very effective operator in this
challenging environment – with on budget, on schedule projects over the last two
winters, excellent relationships with all stakeholders from the Beneficiaries of
the Land Claims, to all the regulatory bodies and project contractors in the
area.  Company management feels a drilling program is technically feasible
to implement for the winter of 2008/2009.
 United
States
  New
Mexico
  Through
its acquisition of Thunder, the Company acquired a 100% interest in 55,000 acres
of property located in northeast New Mexico. Additional land acquisitions have
increased the Company’s land position to approximately 79,000 acres. These lands
have potential for natural gas and CO2 and oil and helium resources at shallow
depths.
  The
Company recently completed a 35 mile 2D high resolution seismic program and a
three well drilling program. The three wells were drilled with air to reduce
formation damage and they were cased to the base of the Yeso formation. Based on
gas detector results, drill cutting samples and open hole logs, all wells showed
three potential shallow porous sandstone formations capable of CO2 production
with up to 200 feet of identified net pay thickness. The Yeso, Glorieta and
Santa Rosa formations were perforated and flow tested to determine
deliverability and pressure. There were multiple gas samples analyzed at
specialized independent laboratories from two separate extended flow tests that
identified CO2 concentration quality from 98.4% to 99.5%. Two of the wells were
stimulated with a nitrified acid squeeze and were able to sustain an extended
flow rate of approximately 375mcf/d. The shallow sands have been mapped using
offset well control and the newly acquired seismic data and the company has
determined there is a very high likelihood of encountering the target formations
throughout the leased project area.
  The 35
mile 2D high resolution seismic program was completed on schedule and on budget
and after reviewing the seismic data, the company was able to effectively map
out a probable long term development area which would result in CO2 production
from the previously identified formations. The seismic is currently being
evaluated to identify possible conventional oil and gas prospects on the leased
project area.
  In
addition a project feasibility study has been commissioned to identify capital
development costs and timelines as well as projected operating costs in order to
provide information to support a long term plan of development.  These
tools will provide the information for negotiating pipeline access,
transportation agreements, sales contracts for the CO2, additional land
acquisition terms and conditions, facility engineering and construction and
ultimately the parameters for financing the project
development.
    33
  Montana
  During
2006, the Company, under a joint venture farmout agreement, participated in a
seismic acquisition program and a two well drilling program to earn a 50%
non-operating working interest in the wells and well spacing. This joint venture
project provides the company with the right to participate on a 50% basis going
forward on this prospect in the Hill County area of Montana. The Operator
of the project had 60,000 contiguous undeveloped acres of P&NG rights in the
area, as well as some excess capacity in facilities and pipelines. Two wells
were drilled in the third quarter of 2006; one is cased for subsequent
evaluation of the multiple zones found and one was abandoned. In order to
facilitate the efficient exploration of this prospect area, the company has
acquired from the original operator a 100% working interest of 12,000 acres of
P&NG rights while retaining the right to participate and initiate operations
on the remaining approximate 48,000 acres of prospect leases. The Montana
prospect is currently being reviewed by the company’s staff geologist and an
exploration program consisting of seismic and drilling will be proposed for Q4
2008/Q1 2009.
  Financial
Condition and Changes in Financial Condition
 (All
dollar values are expressed in United States dollars unless otherwise
stated)
  As a
result of the brokered private placement financings completed in late 2007 and
in June, 2008, the Company was able to conduct an aggressive capital expenditure
program in the first half of 2008. The Company’s total assets have increased to
$36,214,168 as at June 30, 2008 from $34,690,768 at the end of 2007 and just
$2,707,075 at the end of 2006. These increases resulted from the capital
expenditure programs undertaken by the Company in the first quarter of 2008 and
2007 and the financings described under “Liquidity and Capital Resources”. Total
assets consist of cash and other current assets of $2,220,358 (December 31, 2007
- $10,288,410); unproved oil and gas properties and equipment of $33,647,507
(December 31, 2007 - $24,043,005); and other assets of $346,303 (December 31,
2007 - $359,353). Our total current liabilities were $1,513,386 (December 31,
2007 - $2,302,555) and consisted of accounts payable and accrued liabilities
relating to capital activities and general and administrative costs incurred. We
had long term liabilities of $46,898 (December 31, 2007 - $110,955), asset
retirement obligations of $244,401 (December 31, 2007 - $151,814), and deferred
income taxes payable of $52,000 (December 31, 2007 - $57,000).
 Shareholders’ equity amounted to $34,357,483 (December 31, 2007 -
$32,068,444), net of an accumulated deficit of $7,874,783 (December 31, 2007 -
$6,839,439).
  Overall
Operating Results
  In the
six months ended June 30, 2008, the Company had income during the evaluation
period of $ 46 (2007 - $427) and operating costs of $5,273 (2007 - $11,600)
relating to  2006 production from its Granlea, Alberta project. The
well watered out in late 2006 and was deemed uneconomic. Except for that small
amount of production, the Company remains in the exploration stage.
  In the
three months ended June 30, 2008, the Company had income during the evaluation
period of $ 46 (2007 - $42) and operating costs of $4,999 (2007 - $964) relating
to Granlea.
  34
  Net Loss
for the six months ended June 30, 2008 totalled $1,035,344 (2007 – Net Loss
$961,094). As well as the operating expenses referred to above, expenses during
the period consist of general and administrative expenses of $1,070,083 (2007 -
$853,989), including stock-based compensation expense amounting to $355,605
(2007 - $279,083); depletion, depreciation and accretion of $ 25,277 (2007 -
$22,143) and interest expense of $1,257 (2007 - $18,808).
  Net Loss
for the three months ended June 30, 2008 totalled $573,187 (2007 – Net Loss
$647,052). As well as the operating expenses noted above, expenses during the
period consist of general and administrative expenses of $557,918 (2007 -
$559,477), including stock-based compensation expense amounting to $165,469
(2007 - $155,269); depletion, depreciation and accretion of $13,573 (2007 -
$12,622) and interest expense of $1,257 (2007 - $18,808).
  General
and administrative expenses include the cost of employed and consulting
personnel and others who provided investor relations services, public company
costs for SEC reporting compliance, accounting, audit and legal fees and other
general and administrative office expenses. General and administrative expense
also includes stock-based compensation relating to the cost of stock options
granted to directors, officers, employees and other personnel. General and
administrative costs have been increasing as the scope of the company’s
activities have increased and we believe substantial amounts will continue to be
spent on such costs in the near term as we progress with
the  evaluation of our oil and gas prospects. A significant increase
in our shareholder base from 1,000 to approximately 8,000 shareholders during
the past year has also contributed to our increased general and administrative
costs.
  Depletion,
depreciation and accretion for the three and six months ended June 30, 2008 and
2007 includes the cost of depreciation relating to office furniture and
equipment. All of the remaining capitalized costs relate to Canadian and United
States unproven properties and have been excluded from the depletable cost pools
for ceiling test purposes.
  Deferred
income tax expense, for the three and six months ended June 30, 2008 includes a
provision for future income taxes of $ Nil (2007 - $55,480).
  35
  Capital
Expenditures:
  Capital
Expenditures incurred by the Company during the three and six months ended June
30, 2008 and 2007 are set out below.
 Three
      Months
              
              
              Six
      MonthsEnded June
    30
              
              
              Ended June
    302008
              
              
              2007
              
              
              2008
              
              
              2007Land
      acquisition and carrying costs
              
              $
              566,319
              
              
              $
              505
              )
              
              $
              1,172,250
              
              
              $
              27,441Geological
      and geophysical
              
              
              439,842
              
              
              
              1,531,360
              
              
              
              4,552,835
              
              
              
              5,880,837Intangible
      drilling and completion
              
              
              844,761
              
              
              
              234,301
              
              
              
              3,779,509
              
              
              
              266,234Tangible
      completion and facilities
              
              
              38,361
              
              
              
              18,020
              
              
              
              95,275
              
              
              
              52,940Total
      Capital Costs Incurred
              
              $
              1,889,283
              
              
              $
              1,783,176
              
              
              $
              9,599,869
              
              
              $
              6,227,452
  Land
acquisition and retention costs include the cost of new acreage acquired in New
Mexico and ongoing property retention.
  Geological
and geophysical costs include the costs of the seismic programs carried out on
the EL 413 Little Chicago, North West Territory project in 2008 and 2007 and the
New Mexico seismic program for 2008.
  Intangible
drilling and completion costs for 2008 include the Company’s 57% share of the
drilling of the recent Lucy well in British Columbia and 100% of the three well
New Mexico program.
  Liquidity
and Capital Resources:
  Since
inception to June 30, 2008, the company’s operations have been financed from the
sale of securities and loans from shareholders. Working capital at June 30, 2008
amounted to $706,972 (December 31, 2007 - $7,985,855).
  During
the six months ended June 30, 2008, the Company raised $2,855,934, net of share
issue costs, in private placement financing proceeds. This financing has enabled
the Company to fund its on-going capital expenditures and general and
administrative expenses. The Corporation currently has no long term debt
obligations.
  The
Company is seeking additional financing, either through debt, equity or a
combination thereof to cover the estimated cost of its planned programs for the
balance of 2008 and into 2009. In addition, we may require funds for additional
acquisitions. In the event that additional capital is raised at some time in the
future, existing shareholders will experience dilution of their interest in the
Corporation.
  36
  There is
uncertainty that the Company will continue as a going concern, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future. The Company has not generated positive cash
flow since inception and has incurred operating losses and will need additional
working capital for its future planned activities. These conditions raise doubt
about the Company’s ability to continue as a going concern. Continuation of the
Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. The Company’s strategy to address this
uncertainty, includes additional equity and debt financing; however, there are
no assurances that any such financings can be obtained on favorable terms, if at
all, or that the Company will generate positive cash flow. These financial
statements do not reflect the adjustments or reclassification of assets and
liabilities that would be necessary if the Company were unable to continue its
operations.
   ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  The
Company is exposed to market risk from changes in petroleum and natural gas and
related hydrocarbon prices, foreign currency exchange rates and interest
rates.
  Petroleum
and Natural gas and Related Hydrocarbon Prices
  The
Company currently has no petroleum and natural gas and related hydrocarbon
reserves or production so the Company therefore has no current exposure related
to the instability of prices of such commodities. However; the prices of these
commodities are unstable and are subject to fluctuation, due to factors outside
of the Company’s control, including war, weather, the availability of alternate
fuel and transportation interruption and any material decline in these commodity
prices could have an adverse impact on the economic viability of the Company’s
exploration projects.
  Foreign
Currency Exchange Rates
  The
Company, operating in both the United States and Canada, faces exposure to
adverse movements in foreign currency exchange rates. These exposures may change
over time as business practices evolve and could materially impact the Company’s
financial results in the future. To the extent revenues and expenditures
denominated in other currencies vary from their U. S. dollar equivalents, the
Company is exposed to exchange rate risk. The Company can also be exposed to the
extent revenues in one currency do not equal expenditures in the same currency.
The Company is not currently using exchange rate derivatives to manage exchange
rate risks.
  Interest
Rates
  The
Company’s interest income and interest expense, in part, is sensitive to the
general level of interest rates in North America. The Company is not currently
using interest rate derivatives to manage interest rate risks.
  37
  ITEM 4.
CONTROLS AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report,
they concluded that, our disclosure controls and procedures were adequate and
effective and appropriate to a company of its size and stage
of  corporate development in ensuring that material information
relating to the Company would be made known to them by others within those
entities and that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports that the Company
files or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission’s rules and forms.
Our disclosure controls and procedures were also effective to ensure that
information that the Company is required to disclose in the reports that it
files or submits under the Exchange Act is accumulated and communicated to
Company management, including our chief executive officer and chief financial
officer, as appropriate to allow for timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and in reaching a reasonable level of
assurance, management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
   Segregation
of Duties and Access to Critical Accounting Systems
  As at
December 31, 2007, we had a material weakness related to certain employees who
had incompatible responsibilities within all significant processes affecting
financial reporting. This weakness relates to the fact that our Company has only
two individuals in our finance and accounting department, and it is very
difficult to have effective delegation of duties in all circumstances. We also
had a material weakness resulting from our failure to implement controls to
restrict access to financially significant systems or to monitor access to those
systems, which resulted in conflicting access and/or inappropriate segregation
of duties. These material weaknesses affect all significant
accounts.
 
 Our
management has discussed the material weaknesses described above and other
deficiencies with our Audit Committee. In an effort to remediate the identified
material weaknesses, we have initiated plans to undertake the following
remediation activities:
 
 We
established segregation of duties matrices and reviewed the job responsibilities
of our personnel to evaluate how to create appropriate segregation of duties, to
the extent economically feasible given the size and complexity of our operation.
To the extent technically possible, we limit user access in order to segregate
duties within our IT systems and to maintain appropriate corporate
confidentiality. Where that is not possible, we plan to implement controls,
prior to yearend 2008,to verify that incompatible functions performed by the
same individual are appropriately monitored. In any case, our accounting system
functions are maintained in a robust external audited system with its own
multiple levels of checks and balances.
 
 We have
documented this assessment and made this assessment available to our independent
registered Chartered Accountants. We recognize that all internal control
systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
 
 Other
than the afore-mentioned material weakness, management believes our internal
control over financial reporting has been effective during three and six months
ended June 30, 2008.
 CHANGES
IN INTERNAL CONTROLS
  There
have been no changes in our internal control over financial reporting during our
fiscal quarter ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting other than the consideration and furtherance of our plans to
remediate the weakness referred to above.
 38
 PART II -
OTHER INFORMATION
 
 ITEM 1.
LEGAL PROCEEDINGS
  The
Company is not presently a party to any litigation. As at December 31, 2007,
there was a threatened litigation matter against the Company which comprised a
potential claim by a partner regarding the terms of the EL 413 North West
Territory 2006 farm-out agreement. A letter of intent has been signed which will
result in Kodiak purchasing the working interest from the partner, thus, the
likelihood of any litigation arising out of this matter has lessened
significantly and it is not expected to result in any material adverse impact on
the Company’s financial position.
  
 ITEM 1A.
RISK FACTORS
  Going
Concern Uncertainty
  There is
uncertainty that the Company will continue as a going concern, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future. The Company has not generated positive cash
flow since inception and has incurred operating losses and will need additional
working capital for its future planned activities. These conditions raise doubt
about the Company’s ability to continue as a going concern. Continuation of the
Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. The Company’s strategy to address this
uncertainty, includes additional equity and debt financing; however, there are
no assurances that any such financings can be obtained on favorable terms, if at
all, or that the Company will generate positive cash flow. These financial
statements do not reflect the adjustments or reclassification of assets and
liabilities that would be necessary if the Company were unable to continue its
operations.
  The Oil and
Gas Industry Is Highly Competitive
  The oil
& gas industry is highly competitive. We compete with oil and natural gas
companies and other individual producers and operators, many of which have
longer operating histories and substantially greater financial and other
resources than we do. We compete with companies in other industries supplying
energy, fuel and other needs to consumers. Many of these companies not only
explore for and produce crude oil and natural gas, but also carry on refining
operations and market petroleum and other products on a worldwide basis. Our
larger competitors, by reason of their size and relative financial strength, can
more easily access capital markets than we can and may enjoy a competitive
advantage in the recruitment of qualified personnel. They may be able to absorb
the burden of any changes in laws and regulation in the jurisdictions in which
we do business and handle longer periods of reduced prices of gas and oil more
easily than we can. Our competitors may be able to pay more for productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can. Our ability
to acquire additional properties in the future will depend upon our ability to
conduct efficient operations, evaluate and select suitable properties, implement
advanced technologies and consummate transactions in a highly competitive
environment.
  39
  Government
and Environmental Regulation
  Our
business is governed by numerous laws and regulations at various levels of
government. These laws and regulations govern the operation and maintenance of
our facilities, the discharge of materials into the environment and other
environmental protection issues. The laws and regulations may, among other
potential consequences, require that we acquire permits before commencing
drilling, restrict the substances that can be released into the environment with
drilling and production activities, limit or prohibit drilling activities on
protected areas such as wetlands or wilderness areas, require that reclamation
measures be taken to prevent pollution from former operations, require remedial
measures to mitigate pollution from former operations, such as plugging
abandoned wells and remediation of contaminated soil and groundwater, and
require remedial measures to be taken with respect to property designated as a
contaminated site.
  Under
these laws and regulations, we could be liable for personal injury, clean-up
costs and other environmental and property damages, as well as administrative,
civil and criminal penalties. We maintain limited insurance coverage for sudden
and accidental environmental damages as well as environmental damage that occurs
over time. However, we do not believe that insurance coverage for the full
potential liability of environmental damages is available at a reasonable cost.
Accordingly, we could be liable, or could be required to cease production on
properties, if environmental damage occurs.
  The costs
of complying with environmental laws and regulations in the future may harm our
business. Furthermore, future changes in environmental laws and regulations
could occur that may result in stricter standards and enforcement, larger fines
and liability, and increased capital expenditures and operating costs, any of
which could have a material adverse effect on our financial condition or results
of operations.
  The
Successful Implementation Of Our Business Plan Is Subject To Risks Inherent In
The Oil & Gas Business.
  Our oil
and gas operations are subject to the economic risks typically associated with
exploration, development and production activities, including the necessity of
significant expenditures to locate and acquire properties and to drill
exploratory wells. In addition, the cost and timing of drilling, completing and
operating wells is often uncertain. In conducting exploration and development
activities, the presence of unanticipated pressure or irregularities in
formations, miscalculations or accidents may cause our exploration, development
and production activities to be unsuccessful. This could result in a total loss
of our investment in a particular property. If exploration efforts are
unsuccessful in establishing proved reserves and exploration activities cease,
the amounts accumulated as unproved costs will be charged against earnings as
impairments.
  40
  We Expect
Our Operating Expenses To Increase Substantially In The Future And May Need To
Raise Additional Funds.
  We have a
history of net losses and expect that our operating expenses will continue to
increase over the next 12 months as we continue to implement our business plan.
In addition, we may experience a material decrease in liquidity due to
unforeseen expenses or other events and uncertainties. As a result, we may need
to raise additional funds, and such funds may not be available on favorable
terms, if at all. If we cannot raise funds on acceptable terms, we may not be
able to execute on our business plan, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. This may
seriously harm our business, financial condition and results of
operations.
  We Are An
Exploration Stage Company Implementing A New Business Plan.
  We are an
exploration stage company with only a limited operating history upon which to
base an evaluation of our current business and future prospects, and we have
just begun to implement our business plan. Since our inception, we have suffered
recurring losses from operations and have been dependent on new investment to
sustain our operations. During the six months ended June 30, 2008 and the years
ended December 31, 2007, 2006 and 2005, we reported losses of $1,035,344,
$2,775,663, $2,867,374 and $1,133,790 respectively. In addition, our
consolidated financial statements for the six months ended June 30, 2008 and the
years ended December 31, 2007, 2006 and 2005 contained a going concern
qualification and we cannot give any assurances that we can achieve profits from
operations.
  Our Ability
To Produce Sufficient Quantities Of Oil & Gas From Our Properties May Be
Adversely Affected By A Number Of Factors Outside Of Our
Control.
  The
business of exploring for and producing oil and gas involves a substantial risk
of investment loss. Drilling oil wells involves the risk that the wells may be
unproductive or that, although productive, that the wells may not produce oil or
gas in economic quantities. Other hazards, such as unusual or unexpected
geological formations, pressures, fires, blowouts, loss of circulation of
drilling fluids or other conditions may substantially delay or prevent
completion of any well. Adverse weather conditions can also hinder drilling
operations. A productive well may become uneconomic due to pressure depletion,
water encroachment, mechanical difficulties, etc, which impair or prevent the
production of oil and/or gas from the well.
  There can
be no assurance that oil and gas will be produced from the properties in which
we have interests. In addition, the marketability of any oil and gas that we
acquire or discover may be influenced by numerous factors beyond our control.
These factors include the proximity and capacity of oil and gas pipelines and
processing equipment, market fluctuations of prices, taxes, royalties, land
tenure, allowable production and environmental protection. We cannot predict how
these factors may affect our business.
  41
  In
addition, the success of our business is dependent upon the efforts of various
third parties that we do not control. We rely upon various companies to assist
us in identifying desirable oil and gas prospects to acquire and to provide us
with technical assistance and services. We also rely upon the services of
geologists, geophysicists, chemists, engineers and other scientists to explore
and analyze oil prospects to determine a method in which the oil prospects may
be developed in a cost-effective manner. In addition, we rely upon the owners
and operators of oil drilling equipment to drill and develop our prospects to
production. Although we have developed relationships with a number of
third-party service providers, we cannot assure that we will be able to continue
to rely on such persons. If any of these relationships with third-party service
providers are terminated or are unavailable on commercially acceptable terms, we
may not be able to execute our business plan.
  Market
Fluctuations In The Prices Of Oil And Gas Could Adversely Affect Our
Business.
  Prices
for oil and natural gas tend to fluctuate significantly in response to factors
beyond our control. These factors include, but are not limited to actions of the
Organization of Petroleum Exporting Countries and its maintenance of production
constraints, the U.S. economic environment, weather conditions, the availability
of alternate fuel sources, transportation interruption, the impact of drilling
levels on crude oil and natural gas supply, and the environmental and access
issues such as changes in government regulation that could limit or expand
future drilling activities for the industry.
  Changes
in commodity prices may significantly affect our capital resources, liquidity
and expected operating results. Price changes directly affect revenues and can
indirectly impact expected production by changing the amount of funds available
to reinvest in exploration and development activities. Reductions in oil and gas
prices not only reduce revenues and profits, but could also reduce the
quantities of reserves that are commercially recoverable. Significant declines
in prices could result in charges to earnings due to impairment.
  Changes
in commodity prices may also significantly affect our ability to estimate the
value of producing properties for acquisition and divestiture and often cause
disruption in the market for oil producing properties, as buyers and sellers
have difficulty agreeing on the value of the properties. Price volatility also
makes it difficult to budget for and project the return on acquisitions and
development and exploitation of projects. We expect that commodity prices will
continue to fluctuate significantly in the future.
  42
  Risks Of
Penny Stock Investing
  The
Company's common stock is considered to be a "penny stock" because it meets one
or more of the definitions in the Exchange Act Rule 3a51-1, a Rule made
effective on July 15, 1992. These include but are not limited to the
following:(i) the stock trades at a price less than five dollars ($5.00) per
share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it is
NOT quoted on an automated quotation system sponsored by a national securities
association (NASDAQ), or even if so, has a price less than five dollars ($5.00)
per share; OR (iv) is issued by a company with net tangible assets less than
$2,000,000, if in business more than three years continuously, or $5,000,000, if
in business less than a continuous three years, or with average revenues of less
than $6,000,000 for the past three years. The principal result or effect of
being designated a "penny stock" is that securities broker-dealers cannot
recommend the stock but must trade in it on an unsolicited basis.
  Risks
Related To Broker-Dealer Requirements Involving Penny Stocks / Risks Affecting
Trading And Liquidity
  Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the Commission require broker-dealers dealing in
penny stocks to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account. These rules may have the effect of reducing the level of trading
activity in the secondary market, if and when one develops.
  Potential
investors in the Company's common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Commission Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Pursuant to the
Penny Stock Reform Act of 1990, broker-dealers are further obligated to provide
customers with monthly account statements. Compliance with the foregoing
requirements may make it more difficult for investors in the Company's stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.
  43
  ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  On June
18, 2008, pursuant to subscription agreements, the Company closed a private
placement with three investors for 1,204,000 units at a price of $2.50 per unit
for gross proceeds of $3,010,000. Each unit entitled the subscriber to one
common share of the Company and one common share purchase warrant. Each warrant
entitles the warrant holder to exchange one warrant for one common share of the
Company at a price of $3.50 until June 18, 2010. The common shares were issued
pursuant to Regulation “S” (“Regulation “S”) under the Securities Act of 1933,
as amended (the “1933 Act”).
 
  ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
  None.
  
 Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  None.
  
 Item 5.
OTHER INFORMATION
  None.
   ITEM 6.
EXHIBITS
  EXHIBITS
  31.1
- Certification of President and Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
  31.2
- Certification of Chief Financial Officer to Section 302 of the Sarbane-Oxley
Act of 2002
  32.1
- Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
   KODIAK
      ENERGY, INC.(Registrant)Dated:
      August 11, 2008
              
              By:
      /s/  William S. TigheWilliam
      S. TigheChief
      Executive Officer
  44